IMF on Ireland: Ninth Review Under the Extended Arrangement Post author By Philip Lane Post date April 3, 2013 here. Categories In Uncategorized 68 Comments on IMF on Ireland: Ninth Review Under the Extended Arrangement ← SJI Socio-Economic Review 2013 → Finance Conference Announcement 68 replies on “IMF on Ireland: Ninth Review Under the Extended Arrangement” The short read for those of you who are ‘time poor’ (rather than ordinary Irish poor): You aren’t getting enough people with too much debt into even more debt or repo’ing their houses quickly enough so they can get through insolvency and come out the other side to be able to borrow more money. Private debt is good/bad – take your pick. Oh yes – and there aren’t any jobs or any likely to be had in the near or medium term future. Growth is needed but don’t ask us how to go about getting it because we haven’t a clue…. and by the way, your banks are knackered. The views expressed in this post are those of PR Guy and do not necessarily reflect the views of the Executive Board of the IMF. IMF f*** it up again. @PR GUY Re banks are knackered. Haven’t we got the best capitalized banks in the world. 18% tier something or other. Only problem we have is how do we pay back 200,000,000,000! The Cypriots got a good deal…revised again today…2.5%- 2.7% over 22 years, no payments for ten years. And now they want to revise the MOU again So that they can tear it up when they find some dosh… http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_03/04/2013_491707 Ungrateful lot. I hadn’t seen the RTE summary of the IMF report when I posted. It’s dire. 23% real unemployment. Close to Greek levels. The sustainability of the sovereign debt issue is coming into sharp focus. If world growth falters it would seem we are in deep doo dah. And the US numbers today are not promising. Surely the IMF can see that by revving up repossessions the propert market is likely to go into a sharp reversal. The only positive from our IMF friends seems to be the call for the EU to honor their commitments on bank capitalization. But I cannot see it happening with Diesels new methods. Interesting that rte didn’t even try to spin. They took all the money from the taxpayer at the front end and mumbled something about growth then procrastinated as the crisis spread to the continent. Shoddy crisis mgt par excellence. Maybe this will mark the end of Ireland as poster child for austerity. Don’t be nyeg-ative!! @ Fiatluxjnr Please don’t use the word “back” (when you wrote “how do we pay back 200,000,000,000!”). The question you want is “how do we pay 200,000,000,000!” Because as we (the people, or Sovereign) did not receive this money, then it is incorrect to use the word “back”. @Peadar Mea culpa. Box 6 on Report “Ireland is facing an acute unemployment crisis. Since the recession started, employment has fallen by 15½percent, pushing the unemployment rate close to 15 percent, the share of workers unemployed for over 1 year to 60 percent, and the share of very long term unemployed (over 2 years) to 30 percent. If involuntary part time workers and workers only marginally attached to the labor force—two groups that registered significant increases—are also accounted for, the unemployment and underemployment rate in Ireland stands at a staggering 23 percent.” This seems very very high. Is this view shared by ESRI and other bodies? Yet, despite all, nominal GDP for 2015 (180.3BN) is projected to higher than GDP in 2008 (178.9bn). So who is winning and who is losing, or is GDP a useless measurement as far as the Irish economy is concerned? Housing bubbles are particularly hard to stop. Such bubbles have a lot of supporters while they are inflating. Irish banks made money from lending,estate agents made money from commissions on property transactions, as did solicitors and valuers.The Irish Times made enormous profits from their 60 page property supplements, and bought MyHome.ie to become the biggest property auctioneers in Ireland. They essentially became a property auctioneeer with a newspaper bolted on. In the long run the value of an asset must be linked to the income that can be generated from it,rent in the case of property,dividends in the case of shares. It is quite possible for individual assets to shoot up in price since residential areas can become more fashionable and companies can have very successful products. but in aggregate,shares and property prices are constrained by the growth rate of the economy. Below is the link to the elementary property valuation error that bankrupted Ireland; http://www.irishexaminer.com/opinion/letters/a-question-of-valuation-220487.html The FT featured Ray Dalio a few months ago. He runs Bridgewater Associates and reckons that the world economy is 5 years into a deleveraging process that has another 10 years to run. Conditions in the US will be tolerable and on the Euro periphery there will be a depression. Voilà. The IMF is moving towards realism and it’s positive to see a realistic assessment of the medium term risks. Spinmeisters in government should take note. The ESRI appears to have dropped medium-term forecasting because of the uncertainty! Some of the fanciful commentary in recent times echoed the newspeak of the bubble. Some maybe surprised by the broad jobless rate of 23%, after emigration. They shouldn’t be as 333 point action plans will not impact the level nor will a slow recovery. No wonder people prefer lamenting about woes elsewhere. At policy level, the delusionists are still expecting university research to become a jobs engine and Seamus Coffey pointed to an Examiner editorial elsewhere: Over the last five years, since our economy was destroyed, we’ve had analysis after analysis, strident declaration after strident declaration and, if there was a market for delusion, more than enough of it to fund a spectacular and more or less immediate recovery. Surely, after half a decade of public discourse on the crisis it is reasonable to hope that contributions should be in some way connected with reality? Surely the great, magnificent right of free speech is balanced by an obligation to accept some of the basic, grinding realities of our situation? One could start with Richard Bruton, the Oireachtas, media, social partners and so on. There will be no rocket growth, pre-2007 is not going to return anytime soon and relying on US FDI will not sustain a high standard of living. Ireland already ranks with Italy in actual individual consumption per capita. The jobs crisis bring to mind the comment in 1958 by Harry Truman, the 33rd US president who had left office 5 years before: “It’s a recession when your neighbour loses his job; it’s a depression when you lose yours.” The penny will drop in time. The IMF says net exports are very important but most of the growth in services exports in recent years has been delivered by accountants in US multinationals doing intercompany postings to keep their tax bills low. In the real world of course, manna from heaven is rare! Two contrasting articles in the IT and the Independent demonstrate the two conflicting visions (i) that the country itself carries the major responsibility for getting out of its difficulties (ii) Europe must do more of the heavy lifting by taking over the cost of recapitalising the banks. http://www.irishtimes.com/news/politics/reports-show-frustration-at-glacial-pace-of-reform-1.1348042 http://www.independent.ie/business/irish/imfs-grim-warning-on-recovery-is-aimed-at-eu-hawks-29173288.html There would appear to be an increasing recognition that “chronic implementation deficit disorder” (CIDD), as identified by Dan O’Brien, is the condition that needs to be addressed and cannot be further delayed in the expectation that the white knight from Europe will arrive. I have not had time to read the IMF’s paper yet (that is life as an industrious member of an Irish company providing international services) but its hardly going to be a surprise to anyone in the reality based community (or the political left – how did we become the realists!). What I was looking forward to is the combination of hand wringing, fatalism and plain old political fanaticism that the various components of the pro-austerity front were going to respond with to the totally unexpected failure of the current policy set. From the good Mr Hennigan we have an explanation of how the problems of the global financial crisis are actually domestic political problems which we will not tackle and international ones (globalisation, resource shortages) which we can not. Our only chance is to win the race to the bottom. Conservative fatalism, as old as the opposition to popular democracy. I imagine the more nuanced end of the right (Hi John, Seamus) will be trying to come up with explanations of how we have no choice but to follow current policies, despite them making the economy worse and that if only international limitations were different they might bear fruit. This boils down to the policy set being correct but the circumstances being wrong. From DOCM (and Dan O’Brien <sighs>) we have the laughable contention that forced farm collectivization Thatcherite supply side reforms financial deregulation fiscal rules austerity has failed because it has not yet been implemented with sufficient fervour – until we truly believe the confidence fairy will not appear . Whether you want to call this fanaticism, upper class solidarity/feudal loyalty or lunacy is up to yourselves. Anyway, lets not imagine this is a battle we can win with reason, we will need to purge the neoliberal right from government, institutions and the media before we can end the European component of the global financial crisis. When the IMF is calling time you know the European right has completely lost its mind. Banking always does this unless it is run and regulated tightly. The Irish were warned, by me, at the DIRT Inquiry/whitewash that there was a official written order pursuant to a decision by the Revenue not to police tax evasion by the banks. No one wanted to rein in the banks. Germany was ruled a pariah in 1933 for creating money by government and not by private banking. They created almost immediate full employment. Germany has not suffered any greed for the banks this time, either. I hope you all learn real economics, and relive history. It promises to kill quite a few! Meanwhile the population declines, unlike any other country, except now, after 300 years, Russia, Japan and Germany are also declining. Perhaps you will alter a few text books, to reflect that banking inevitably corrupts the system and becomes a boom and then a bust? Why do you think Stalin hated Kondratieff for establishing this? @ DOCM ‘There would appear to be an increasing recognition that “chronic implementation deficit disorder” (CIDD), as identified by Dan O’Brien, is the condition that needs to be addressed and cannot be further delayed in the expectation that the white knight from Europe will arrive’ Dan says earlier in the piece: ‘Ireland’s resort to aid from the international community had its origins in sins of omission (mainly the failure to regulate banks properly and manage the public finances prudently) rather than in the sins of commission in Greece (systemic corruption and proactively bad policy decisions over decades which hobbled the capacity of the economy to function efficiently)’ The reasons for CIDD have been rehearsed here many times. Most of our governmental functions are firmly in the grip of private vested interests. There is an inner circle of ‘corporate advisers’ and ‘fixers’ which may change places with a change of government, but, comes from the same pool of ‘natural’, self reinforcing privilege. With some exceptions, it’s the L’Oreal effect. The government dominates the Dail, TDs are bought off with a generous terms and allowances, and all of the important deals are done in secret. The TUs are well aware of that reality, and have been in a position to extract some countervailing benefits for members. The social welfare system has been used to damp down the challenge from excluded sub-citizens, and to conceal the more general failure of economic development. Given the IT’s role in the bubble, and its particular role in the lives of our ‘cultured classes’, Dan has to serve up a fairly watery brew. It won’t sustain us in the hard years to come. Facing down vested interests is a very challenging agenda. Unless we implement that task, however, all we can expect is a process whereby our own ‘internal periphery’ terms is progressively abandoned. That means more business and public service closures, especially in rural Ireland, and in ‘Cinderella services’ such as disability. We can also look forward to longer waiting lists, poorer response times, and a move towards a more contractarian ‘pay as you go’ society. ‘Internal periphery’ can be seen in geograpical or social terms. “Recent developments appear consistent with GDP growth of about 1 percent y/y in 2013.” Flatline growth. No sign of the return to trend prayed for in 2009. The budget in 2010 predicted growth of around 4% and the forgiveness of sins by now. What will another 5 or 10 years of 1% growth mean? @ Paul RTE viewers know more about sport than they do about economics. It’s because sports commentators don’t have as much social magic dust but also because the info is accessible. Losing 60 nil to the All Blacks is understandable. As it playing poorly against Scotland. And they know when it’s time for the national rugby team coach to go. But Troika stuff is far more mysterious and there’s far more waffle. @ Paul Quigley I would not be that pessimistic. The employment situation, for example, seems to be stabilising, if at an unacceptably high level. However, the key consideration, it seems to me, is the fact that the country is being pushed, willy-nilly, towards “evidence-based policymaking”, as the director of the ESRI, Frances Ruane, described it in a recent IT commentary with the troika providing both some of the evidence and the impetus to collect even more. http://www.irishtimes.com/news/politics/public-policy-must-be-based-on-evidence-and-not-on-ideology-or-anecdotes-1.1324140 Where I would part company with her analysis is the implicit acceptance of the distinction – often largely artificial – between the public and the private sectors. One has to start with the question; what is to be done? And then decide the best means of achieving the decided objective. This approach has worked exceptionally well in Scandinavia, as I never tire pointing out, with Sweden, for example, a country of nine million people being able to run a successful economy with a core of policymaking public service of less than 5,000 officials. This is in the interest of all concerned. However, it remains to be seen if events will force such a radical jump in thinking, especially given the historic heritage of the British public service. ‘Japan and UK must lead way to reflation’ http://www.ft.com/intl/cms/s/0/8c6d4e70-9c49-11e2-ba3c-00144feabdc0.html#axzz2PV4L2wry http://www.irisheconomy.ie/index.php/2012/04/01/bailing-in-senior-bank-bonds/ – comment 8.20am The older wizard jogged one tweed covered leg admired his spats and threw down the report on the table where, as all such reports do, it immediately yellowed and covered itself with dust. “What do you make of it?” The round-faced, red-haired wizard did not glance away from his mill-stones, which at that time were trying to reduce some particularly obstinate facts regarding houses to a more granular consistency. They would conglomerate when he wanted them to disaggregate. “You didn’t come all the way to my humble little mill in Cork, Irish Grand Wizard Humbledore, for my opinion on the Madame Lagarde’s latest attempt to talk sense to the Commission.” “You’re right, I didn’t of course. Any chance of that cuppa Coffey?” The silence of a man who had heard the remark a thousand times filled the room. “Alright then Coffey. I wouldn’t mind your opinion on this.” With that, Humbledore elegantly flipped his Irish Deerstalker onto a wooden table between some glass beakers. It fell top down. Coffey glanced at the older man. He thought he looked strained and pinched under the familiar genial surface. It was traditional that a wizard would use his most powerful hat for such work, but the blue and gold cone of the grand confederation of Frankfurt was nowhere to be seen. The inner lining of the hat clouded, marbled, and then a scene formed and rose in miniature above the hat. It had the strange property that the closer one looked the more one felt one was falling in to another world. It showed a hunting scene in old Japan. A castle stood on a hill, dominating the green sweep of valleys beneath. The castle was dilapidated, with slates and even walls falling away, while the disrepair and gloomy lack of work in the country about showed itself in empty warehouses, half-tended fields, broken fences and flooded roads. A party had paused from the hunt. Coffey recognised various flags and signs and concentrated to comprehend who had gathered. At the centre of a circle of listeners, one particular Samurai, whom Coffey recognized by the pattern of his head shaving as the Grand Wizard of that country had produced three arrows. He brandished them about, then took all three and bent them over his knee – demonstrating that the three together could not be broken. “You won’t break me I’m part of the union”, hummed Humbledore. Then the Japanese Grand Wizard took a single arrow and fired up the hill. The arrow flew to the castle, burst against the wall and a million: billion?, of what Coffey recognised as Koku, glinted and burst across the land. At once peasants and workers grasped the koku – some turning them to rice to plant in the fields, others to starting to buy new tools and equipment for work. Idle merchants began to trade. Now the Grand Wizard passed the bow and arrow to Shogun Abe, who in turn fired the second arrow. The peasants, workers, administrators, merchants and all got busy: mending the fences, the roads, draining the land, restoring the castle walls, fixing the roof. The scene was one of bustle and energy and the outlines of a new landscape were picked out. Finally, the Shogun fired the last arrow. At this the work which, it must be said, was somewhat higgledy-piggledy in character, became organised and more effective. Labour and reward were well matched as the Koku, like rain passing through a well made set of sluices and channels, made their way through the parched country. “You do know the Japanese have cars, skyscrapers and nuclear reactors?” remarked Coffey. “Oh yes, but I’m a Lafcadio Hearne fan. It’s the way I see things.” “Has this happened or is it yet to come?” “The arrows are being fired. What you see is the hope.” “Are we the only ones watching?” “Of course not.” With that Coffey became aware of the gloomy fortress at Franfurt, with the faint wails coming from the dungeons underneath, the frail Grand Old Lady and the plain house to the West: all looking on intently. “What is this to us” “I thought you might like to see this.” Humbledore placed a old, carved wooden box on the table: Celtic knots led the eye in an endless triple pattern. “In that is the three-bladed sword of Cuchulainn. It has much the same powers as the three arrows. We keep it the box now as we haven’t be able to take it out in a while.” Coffey eyed the padlock, with the bright doubled crossed E on it. “Those arrows have not been fired in 80 years.” “They are being fired now.” “You’re not thinking…” “Perhaps you might run some hypothetical figures on it Wizard Coffey. You know, something in the same scale. It would be interesting to know, merely for academic interest of course. Perhaps one of the younger wizards with a bit of pep, Whelan perhaps, might work up a paper.” “I might need a larger millstone.” “Lane, what do you think? Oh come on Lane, you’re there.” The china cat on the mantelpiece with the faint smile shifted imperceptibly. “Where the Japanese see labour and reward, our friends in Frankfurt look in their hats and see wheelbarrows.” “Yes, well, it is a matter of perspective. But as I say, the arrows have been fired. Impossible yesterday, unthinkable today, the obvious tomorrow. Isn’t that the way it goes?” “Worth keeping an eye on certainly.” With that the cat returned to its glassy state. “Well, I shall be off before I’m missed. You will give me those figures Coffey. Everyone else’s are, well”, his eye caught the IMF paper that was now slightly browning at the edges, “not worth the paper really are they.” Coffey returned to his work, flattered that his mill still ground true but a little uncertain. He knew well enough that it was not necessarily a pleasant think to have the attention of the powerful. ENDS Draghi says original Cyprus plan “was not smart to say the least” Meanwhile Barosso is off somewhere telling people the Eurozone crisis is over.. http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_04/04/2013_491857 17 “not smart” Finance Ministers+Barosso, Rehn et al and of course the delightful Christine approve a plan which was obviously going to create consternation. In the meantime Draghi let’s the sores fester and does nothing while Japan takes unprecedented action to get their economy going… http://www.nytimes.com/2013/04/05/business/global/japan-initiates-a-bold-bid-to-end-years-of-falling-prices.html?hpw&_r=0 I’m wondering if the plan is to let the EU and Eurozone die naturally while the rest of the world move on? @ Shay Begorrah Your defence of Big Pharma reminds me of ‘Militant tendency’, a Trotskyite group within the Labour Party, that controlled Liverpool city council for a while in the 1980s. Slogans are easier to hurl around from the ditch than running a city. Neil Kinnock, the then party leader, said this at the annual Labour Party conference in 1985: “I’ll tell you what happens with impossible promises. You start with far-fetched resolutions; they are then pickled into a rigid dogma, a code, and you go through the years sticking to that, out-placed, outdated, irrelevant to the real needs, and you end in the grotesque chaos of a Labour council, a Labour council, hiring taxis to scuttle round the city handing out redundancy notices to its own workers. I tell you – and you’ll listen – you can’t play politics with people’s jobs and people’s homes and people’s services.” When politics didn’t work, one of the Militant leaders eventually became a property developer in Cyprus. What Dan O’Brien was referring to was the Government’s commitment to the IMF to legislate by June 30 to provide for the greater use of generic drugs – – almost 6 years since the onset of the international credit crunch. The cost of Irish State financed drugs schemes doubled from 2002 to over €1.6bn in 2008. Fees and other income earned by pharmacists doubled accordingly. It cost the taxpayer an exorbitant €640m to get €1bn of drugs from factory gate to patients in the community in 2008. The drugs bill was almost €2bn in 2012 and generic drugs accounted for only 5% of the value according to the Department of Health. Why does it take so long to implement change that would bring big savings? At present, pharmacists are precluded from substituting prescribed branded drugs with a suitable generic. So, if your prescription says Lipitor for example, then this is the drug you must get, even if there is a cheaper alternative. People who haven’t got a medical card and are not typically rich are also screwed when buying drugs. So Dan’s commentary is advocacy of Thatcherite supply reforms! MH, Are you sure that pharmacists may not substitute a generic where one exists for a branded drug? i would double check that. @Gavin Kostic Quantitative easing has been a dismal failure in the UK and a disappointment in the US. Up to now Japan economic policy has been a disaster for more than 20 years ,the enormous deficit spending and the several attempts at QE have had no success in reviving the moribund Japanese economy .This time the enormous public debt might be the straw that breaks the camel back. Abe’s policies are more an act of desperation than a well thought out strategy. @Overseas commentator Quantitative easing has been … a disappointment in the US. It is always easy to have hoped for more and end up being disappointed; however USA: Real GDP is 2.5% above the pre-crisis peak and trending up EU: Real GDP is 2.5% below the pre-crisis peak and trending down USA: unemployment is 7.7% and trending down EZ: unemployment is 12% and trending up Are these figures just luck or the result of policy choices? The fact is that the crisis has been handled far better in the USA than in the EU/EZ. The policy combination of fiscal stimulus, QE and financial-industry absorbed losses has produced demonstrably better outcomes, and at lower cost to the taxpayer. @Overseas commentator at 3:46 pm Quantitative easing has been a dismal failure in the UK and a disappointment in the US. Up to now Japan economic policy has been a disaster for more than 20 years ,the enormous deficit spending and the several attempts at QE have had no success in reviving the moribund Japanese economy .This time the enormous public debt might be the straw that breaks the camel back. I think you are probably correct in your judgment of the adverse impact of quantitative easing. I say probably because the leading lights in macroeconomics differ in their views, and it is only be adding common sense to the equation that one can perhaps tip the balance in favour of the anti-QE partisans. Let me explain. Here are some extracts from a report on a 4-day symposium of leading economists held in Lindau and St Gallen in August 2011: Nobel-prize winning economists including Robert Mundell, Reinhard Selten and Myron Scholes favor tough austerity measures to tackle deficits in Europe and the U.S. amid debt crises that shook the euro and saw the world’s largest economy lose a triple-A rating. The Nobel winners, meeting in Lindau, Germany and St. Gallen, Switzerland at a four-day symposium, said “draconian” measures were needed in economies from the U.S. to Greece, to tame debt levels even as global growth cools. […] At the same time, fellow Nobel laureate Joseph Stiglitz argued that as the chances the U.S. economy will go back into recession are “very high,” austerity policies are misguided, and go “exactly in the wrong direction.” “The most important way to address the deficit is to get America back to work, to get the economy back to full employment,” Stiglitz told journalists on August 25. “There has to be stimulus, there has to be spending.Monetary policy is not likely to be very effective,” Stiglitz said, countering calls for further rounds of Quantitative Easing by the Federal Reserve. http://www.bloomberg.com/news/2011-08-27/nobel-economists-back-austerity-as-europe-u-s-slash-budgets.html The first question that occurs to the educated layperson is how on earth is it possible to take a discipline seriously whose most prestigious academics differ on such fundamentals as the pros and cons of government spending in the midst of an economic crisis? The second question is: can an educated layperson come to any conclusion at all other than that the only certainty is that there is no certainty? Well, I think if one factors in common sense one can come to a probabilistic conclusion that the ‘austerians’ are basically correct. Common sense says: if you dig yourself into a hole you can’t get out of, stop digging. But of course common sense is not always correct (the ‘fallacy of composition’ being a good example — more about that at a later date). I hope to develop this point in some upcoming, lengthy posting. It will include a detailed comparison of the similarities and differences between macroeconomics and rocket science. I would welcome postings that reveal any weaknesses in my argumentation. @ CG There are none! However, the contradiction might be resolved to some extent by recognising that what may be right in one society may be wrong in another. After all, the US, the EU and Japan are not exactly like chalk and cheese. The point comes up in Brian G’s reply to OC above. The US performance is better but then it is a unitary state with a fully integrated market with the world’s reserve currency at its disposal. CMcC put the point in the form of a rhetorical question on the most recent Cyprus thread. “Of course the haircuts may, in the eyes of the ECB, be inadequate to ensure solvency. In which case why is the deal not modified further? Capital controls effectively create an inconvertible currency trapped in Cypriot banks, a precedent likely to be remembered when trouble strikes elsewhere. Do re-opening US banks decline to release deposits after the Feds have done their work, for the want of a lender of last resort?” The answer is, of course, no because there is no ambiguity about the LOLR role of the Fed. This is still a work in progress in the Eurozone. @CG Well, I think if one factors in common sense one can come to a probabilistic conclusion that the ‘austerians’ are basically correct. …. I would welcome postings that reveal any weaknesses in my argumentation. If you factor in the observable outcomes why do you think the austerians are basically correct? You are saying that if the European policy mix (which was in fact promoted by some Republicans in the 2008 elections) had been applied in the USA, that growth would be stronger than it is and that unemployment would be lower than it is. Can you provide any evidence whatsoever in support of that? @DOCM … what may be right in one society may be wrong in another. Thanks, a good point. And what may be right at one particular moment in history may be wrong at another (even for the same society). While I’m on my hobby horse: a good example of an open-minded pro-austerity economist is Wilhelm Roepke (who, as every commenter here knows) was the founder of German Ordoliberalism. Reading his long-forgotten book ‘Civitas Humana’ (1948), I came across the following passage on his policy response to the Great Depression in Germany (page 207): “It was in these circumstances that it became evident […] that a fatal vicious cycle had arisen which ought to be broken at all costs by bold and energetic measures of business-cycle policy, so that together with the economic crisis the political situation could be controlled. We realized that we had to deal with an emergency with which it would no longer be possible to cope on the familiar orthodox lines of the accepted business-cycle policy and that an “active business-cycle policy” would have to be embarked upon. …I can remember very well that evening when the basic idea of this business cycle policy became clear to us, but we all immediately agreed that it was dynamite which we were handling and that it ought not to be allowed to fall into the wrong hands.” A must-read for all austerians (myself included). The wrong hands? Krugman? Stiglitz? Munchau? @Bryan G You are saying that if the European policy mix […] had been applied in the USA, that growth would be stronger than it is and that unemployment would be lower than it is. Can you provide any evidence whatsoever in support of that? Since I am not actually saying that, I feel under no obligation to provide evidence in support thereof. As far as I know macroeconomists (as is their wont) interpreted this ‘European policy mix’ differently. The same old story I reckon: two Nobelists, two interpretations, ten Nobelists, ten interpretations. I’m pretty clueless as to which is correct. The educated layperson sighs, shrugs his shoulders, takes out his box set of the Ring of the Nibelung, and watches thru for 15 hours until the fat lady sings. @CG Since I am not actually saying that, I feel under no obligation to provide evidence in support thereof. It is however a logical consequence of your position that austerians are basically correct. In the USA there were and are plenty of austerians that want to slash fiscal spending and stop and unwind QE. (“If elected I’ll fire Ben Bernanke”). So if they are basically correct and had been elected in 2008, do you think that GDP growth and unemployment would be better or worse than they actually are? @DOCM …that what may be right in one society may be wrong in another. What is right is to get to the desirable outcomes. If you are saying that the EU has severe institutional, political and decision-making problems, then that does not make the policy choices dictated by that condition “right”, and alternatives “wrong”. It suggests that the Euro architecture and its associated institutions need to be changed, to allow the policy options that might actually work to be introduced. @ CG, any other recommendation from the same author ? @ CG There is another aspect which may also help explain the academic schism; both sides may be placing excessive reliance on faulty models. To me as a layman, and having studied the more recognised, the participants in debate might as well be playing with model train sets. I frankly do not know whether Germany is wrong or right in its present rigid adherence to orthodoxy. As you point out, probably correct in terms of substance but wrong in terms of timing. To borrow from the FT coverage on Draghi today; “A key argument against any further interest rate cuts has been the fragmentation within the eurozone of real interest rates paid by businesses, especially smaller ones in Europe’s southern periphery. Efforts to fix the so-called transmission mechanism by which ECB rates translate into those paid by companies and households have not so far borne fruit. Mr Draghi said the bank was looking into unspecified “instruments” that could be deployed to deal with the financial fragmentation. “We are considering both standard and non-standard measures, and we are thinking 360 degrees on the non-standard measures,” he said. “We will see which of these tools are either feasible or effective in our specific institutional context.” He added that national central banks had a role to play. In an apparent allusion to the French economy, Mr Draghi said economic weakness “is extending to countries where fragmentation is not an issue”. A survey of purchasing managers in France released on Thursday confirmed that business activity in its service sector in March was falling at the fastest rate for more than four years. For the bloc as a whole, a final composite PMI index for the month showed no end to the downturn with a reading of 46.5 – below the 50 level that represents growth and lower than the figure for February, according to the data compiled by Markit. Nonetheless, the bank still expected a “gradual recovery” in the eurozone in the second half of the year, Mr Draghi said.” Can Merkel keep this up until September? @ Bryan G I think Ben Bernanke would be the first to admit that things did not turn the way he hoped and I am sure he must wonder how he will be able to shrink the Fed’s balance sheet to a reasonnable size if the employment rate goes back to normal.This does not mean that he was wrong to do what he did,only that the cost was higher and the results smaller than “helycopter Ben” hoped. The ECB’s balance sheet is also exploding due to the credit to the banks against crummy collaterals and it is perfectly artificial to oppose “austerians” in Europe and “permissive ” Americans. It seems to me that the main European problems are structural ,mainly the vast gap in productivity between the North and th South of Europe and not the search for the optimal fiscal or monetary policy. It is not because Cyprus,Ireland and maybe Malta tomorrow suffered from a bloated bankink system that this was a problem in the other European countries (except maybe Spain). Brian G et al. In the early part of the decade, real rate for most of the periphery were too low so contributing inter alia to a credit boom. Now after, the resultant bust, real rates in the periphery are too high so contributing inter alia to a depression. In the absence of any fiscal transfer, Monetisation and debt restructuring it seems to me that the most likely option is that one or more of the periphs decides to cut and run. There is no debate here of that option. There should be. @ CG To answer my own question, the only catalyst that will rescue Draghi. and Europe. from the current downwards spiral IMHO must be some acceptance by Germany of the mutualisation of EA debt. It is either that or an unnecessary collapse of the euro and with it probably that of the EU. For the policy wonks! http://blogs.law.harvard.edu/corpgov/2013/03/22/the-supply-and-demand-for-safe-assets/ @Bryan G So if [the austerians] are basically correct and had been elected in 2008, do you think that GDP growth and unemployment would be better or worse than they actually are? My point is that, factoring in common sense, there is a marginal probability that the austerians are ‘basically correct’. But I did provide you with a citation from the non-fundamentalist austerian Wilhelm Roepke, who argued that in certain emergencies (such as Germany in the 1930’s) it would no longer be possible to cope on the familiar orthodox lines of the accepted business-cycle policy and that an “active business-cycle policy” would have to be embarked upon — see my posting at 7:02 pm today. So perhaps you are right. What more can I say about this other than repeat myself? You might be right, and I might wrong. @francis any other recommendation from the same author ? Wilhelm Roepke, I presume. I have only read his Civitas Humana (1948), which I bought second hand via Amazon. Alas, Roepke is now a worst-seller. The copy I bought turned out to be a discard from Kent County Library and had been lent out on the following dates, judging by the library date stamp: 10 JUN 1949 29 JUL 1949 8 DEC 1949 [a thirty-year gap] 18 SEP 1979 29 OCT 1979 [another decade passes] 1 MAR 1986 And then, virtual oblivion (at least in Kent). Roepke online: Crises and Cycles (1936) International Economic Disintegration (1942) The German Question (1946) The Social Crisis of Our Time (1950) International Order and Economic Integration (1959) A Humane Economy: The Social Framework of the Free Market (1960) Economics of the Free Society (1963) Against the Tide (1969); posthumous essay collection Two Essays by Wilhelm Roepke (1987) Wikipedia entry on Roepke: http://en.wikipedia.org/wiki/Wilhelm_R%C3%B6pke @ DOCM “We will see which of these tools are feasible or effective” This presumably includes Dijsselbloem. @ Carolus Roepke lived through the 30s but at the end they still had a functioning planet. Is it still winter where you are? Have you come across “Down to the wire” by Orr? He says “The markets aren’t going to save us” In one sense this crisis is totally artificial . The one coming won’t be. It won’t be balance sheet driven . @ CG I am trying very hard, to not collect many more books. So I will get the civitas from the library, and maybe look at social framework P.S. I had Siegfried and Goetterdaemmerung over the last weekend : – ) @DOCM at 8:27 pm the only catalyst […] must be some acceptance by Germany of the mutualisation of EU debt Germany has de facto already mutualised a considerable proportion of EU debt. Does ANYBODY – austerity proponent or stimulus advocate – seriously believe that Greece (e.g.) will ever repay more than a fraction of the loans it has received from the Northern EU member states? I don’t think so. It is either that [i.e. mutualisation – CG] or an unnecessary collapse of the euro and with it probably that of the EU. Why ‘unnecessary’? At some stage the growing, periphery-induced debt burden on Germany may become so great that the cost of collapse will be deemed by German voters to be less than the cost of maintaining the currency. Collapse may be the best thing since sliced pan. Or the worst thing. Whatever the outcome, both sides of the fence will of course continue entertaining the reading public with their unfalsifiable, counterfactual claims: if only, if only, not enough mutualisation, too much mutualisation etc. etc., more stimulus would have worked, austerity policy wasn’t austere enough … Back to the Goetterdaemmerung. @ CG That is why I think that it will ultimately be accepted by Germany as the lesser of two evils. There is no other means of restoring consumer and business confidence which should, at least, enable more of the loans to be paid back. The question is when and whether it will be in time. The IMF propose, and some economists seem to drool for, getting on with sorting out the ‘mortgage’ problem. Once again, the theory being that the banks need the capital, ie, we must fix the banks and get lending going into the real economy. Just as we heard it all abour four or was it five years ago. So when the OOs end up on the street, [the BTLs being a very protected species indeed], two questions? 1. How much will the banks get for the repossessed property. 2. As AIB owe about 26bn to ECB/ICB and BOI owe about 14BN to ECB/ICB, where do people think the money will go, into the real economy? Lets all come into the real world. @seafoid Is it still winter where you are? I returned from Athens this afternoon. It was springtime for me and my acquainances at the (absolutely futile) Commission Task Force. It is winter all the year round for most Greeks though. Roepke lived through the 30s but at the end they still had a functioning planet. Greece is a good dry run of what a non-functioning planet may soon look like. “The markets aren’t going to save us” In one sense this crisis is totally artificial. The one coming won’t be. Sometimes I forget to put on my Nicholas Georgescu-Roegen hat (Entropy and the Economic Process). It is very difficult to think permanently outside the conventional box in the context of this website. @francis re: Siegfried, Goetterdaemmerung. Which DVD box set of the Ring? Paris? Luebeck? Copenhagen? Barcelona? The Met? Or are you a Furtwaengler-only purist? Perhaps The Ride of the Valkyeries is the most fitting for our times. Apocalypse Now. @Overseas commentator The Fed’s balance sheet is big, but it is still less than 2% of the USA’s (private and public) total assets, so it’s not that big relative to the overall size of the economy. However the purpose to which it is being used is quite different to that of the ECB’s balance sheet expansion. It is part of a larger picture whereby the losses following the crisis are being allocated across different sectors, i.e. currency holder via monetization/inflation, taxpayer, and financial institutions. The ECB refuses to participate in this manner and absorb any losses (notwithstanding the huge asset bubble that materialized under its watch). It will arbitrarily declare that a Greek bond held by the ECB is worth 100% and another bond from the same issue is worth 25%, or enforce the bizarre BoC/Laiki restructuring to preserve and enhance its ELA collateral. In the EU, the portion of losses to be absorbed by financial institutions depends primarily on where that institution is located and not on any principle. As a consequence the portion of losses borne by taxpayers is much greater in total, and heavily skewed towards the periphery. You can view the loss allocation process as a pie-chart – you can change the relative size of the sectors, but in the end they all add up to 100%. In the EU the amount of losses allocated to the monetary authority is 0%. If you begin with a Euro architecture that was a deeply flawed compromise to start with, and then compound the error with a policy response/dogma that there’s nothing wrong with the architecture itself, only the lazy/corrupt/indisciplined behaviour of its peripheral members who need to be whipped into shape, then the current situation is completely unsurprising and expected. @ DOCM Genau 🙂 @ Tull Macadoo In the absence of any fiscal transfer, Monetisation and debt restructuring it seems to me that the most likely option is that one or more of the periphs decides to cut and run. There is no debate here of that option. There should be. The catch-22 is that it only seems possible to exit the Euro from a position of strength, not one of weakness. The estimated impact of a sudden Euro exit for Cyprus was pretty devastating. I think a longer term strategy of getting into a position whereby you can exit the Euro makes more sense. You can try and fix it up a bit as long as you are trapped, and let the French and Italians do whatever they think they need to do to keep Germany under control (they wanted the Euro, Germany didn’t), but a single currency for 17+ vastly different countries just isn’t going to work in the long term. 9th review. They must notice a few patterns now every time they horse into a new review. And the hole in the bucket phenomenon. And I wonder if there are surly DoF types who remind them occasionally that the tablets haven’t kicked in yet. @DOCM That is why I think that it [i.e. mutualisation – CG] will ultimately be accepted by Germany as the lesser of two evils. There is no other means of restoring consumer and business confidence Virtually ALL of the German economists who CORRECTLY predicted that the euro would be a disaster for the EU and Germany itself would disagree with you. They got it right twelve years ago — almost uncannily right. Therefore I think they’re more likely to get it right now than the sunny-side faction who were convinced that the introduction of the euro was the primrose path to political union and everlasting European harmony. Here’s an excerpt from a recent article by the conservative pundit Arnulf Baring, published in the right-of-centre weekly Focus: Dieser Euro war keine gute Idee Angela Merkel wird als Totengräberin des Euro in die Geschichte eingehen. Die Zukunft ist ein Europa der Vaterländer. Der Nationalstaat kehrt zurück […] Beraten vom Bankier Sieghardt Rometsch, schrieb ich vor 15 Jahren, vor der Euro-Einführung, in „Scheitert Deutschland?“: Die Währungsunion werde auf ein gigantisches Erpressungsmanöver und eine Transferunion hinauslaufen. Leider habe ich mich nicht geirrt. English: The Euro was a bad idea Angela Merkel will be remembered in history as the gravedigger of the euro. The future is a Europe of nations. The nation-state is returning […] This is what I wrote 15 years ago, before the introduction of the euro, in “Will Germany Fail?”: The monetary union will amount to a huge blackmail operation and a transfer union. Unfortunately, I was not wrong. … The full article is here: http://www.focus.de/politik/deutschland/politik-dieser-euro-war-keine-gute-idee_aid_681571.html Wishful thinking about the euro is certainly no longer as popular as it used to be. @CG Germany has de facto already mutualised a considerable proportion of EU debt. Not really. It has taken on a contingent liability that is the same per capita as all other countries (ignoring some EFSF stepping out weirdness). If that contingent liability is called upon its cost to service that will be less than anyone else’s. In the meantime it benefits from the flight to safety caused by the crisis itself, the investment of ESM paid-in capital in its own bonds, SMP profit distributions etc. So yes it will end up paying something, but relatively speaking less than anyone else on a per capita basis. I don’t buy anyone claiming to be an expert on what will happen. Even some german who made a call in 99. There are so many variables. Massive model error risk. It is very difficult for anyone to retain the old social magic in times like these. @Bryan G I wrote: Germany has de facto already mutualised a considerable proportion of EU debt. You wrote: Not really. You seem to be a pro in this field so I will qualify my statement as follows: From the perspective of a growing number of German voters, Germany has de facto already mutualised a considerable proportion of EU debt. For the political class, the voter’s perspective is their reality — even if the voter is mistaken. Besides, as I argued above, the sceptics who got it right a decade or so ago are more likely to get it right now than those who got it wrong then. @seafoid I don’t buy anyone claiming to be an expert on what will happen. Ditto, but the pessimists who claimed to be experts in the past — and got it right — have a better track record than the incurable optimists who got it wrong from the word go. My Rhodesian ridgeback eagerly awaits his late-night constitutional. Then bedtime. Good night all. @ Tull Mcadoo Are you sure that pharmacists may not substitute a generic where one exists for a branded drug? i would double check that. Page 3 of May 2010 report, ‘Proposed Model for Reference Pricing and Generic Substitution,’ that was commissioned by the Department of Health. “Existing legislation in Ireland requires that the medicine dispensed is exactly what is written on the prescription. In many countries, medicines that have been designated as interchangeable can be substituted by the pharmacist. This means that a designated interchangeable medicine, with the same quality and clinical efficacy, can be dispensed.” http://www.dohc.ie/publications/pdf/reference_pricing_generic_substitution.pdf?direct=1 At least €1bn in public spending could have been saved in the past 3 years, apart from savings for people who have to buy their medicine. Strange? @Michael Hennigan http://www.finfacts.ie/irishfinancenews/article_1025755.shtml An interesting fact from your own website. “In Germany, the top 10% of households by net worth own 60% of the country’s wealth.” There in a nutshell explains the economic and political position of Germany and Europe, at this present time. It is news to me that there is such an imbalance in a supposedly social democratic Europe, but there you have it. Every German and by extension EZ policy is geared towards the protection of that wealth through a no inflation policy and through a policy of ‘competitiveness’ amongst the serfs who continue to bring in the harvest of wealth. @ CG, it was the Met / Levine edition And since you seem to be an expert, do you recommend a better edition, to buy? I am just starting with him, although I live close to where Wagner wrote Siegfried and organized the 1849 revolution, together with Bakunin : – ) And a formerly greek officer Heinze elected as military leader of the uprising. European history at its best : – ) Your statement: “From the perspective of a growing number of German voters, ” surprised me a little bit, I see more hardening across all colors, so I would be interested if you have further information / link to it. @Bryan g The federal reserve system does not absorb any losses, willingly or unwillingly ,in fact it is nicely profitable (if this means anything).Its exposure to risk is rather small, out of 3000 billion in its balance sheet 2/3 are US government securities and 1/3 mortgage based securities ,valued in such a way that it is practically impossible that in the aggregate the Fed will not make money. Depicting the Federal Reserve System as a mechanism to monetize losses is misleading to say the least .It is true that it takes a (small) part in financing the US deficit, which the ECB cannot do for European states , but the purpose of the system is to provide liquidity to the economy ,not to absorb losses. @ CG “Angela Merkel will be remembered in history as the gravedigger of the euro. The future is a Europe of nations. The nation-state is returning […] This is what I wrote 15 years ago, before the introduction of the euro, in “Will Germany Fail?”: The monetary union will amount to a huge blackmail operation and a transfer union. Unfortunately, I was not wrong…” This comment shows that the author has zero political nous. Insofar as a transfer union exists, it is largely in the direction opposite to what the author states unless the roof caves in. Whatever ambitions Merkel has, going down in history as the gravedigger of the euro is hardly one of them. Merkel miss-sold the implications of what she has been doing to the German electorate and she cannot fess up this side of the federal elections. That is the crux of the political problem at this juncture. Incidentally, Kevin O’Rourke has opened a thread on the recent blog post by Simon Wren-Lewis on the inaction of the ECB. It could be summed up in the plaint; “Why, oh why, cannot the ECB be more like the Fed?”. (A reading of the comment by Rik is recommended). DOCM, your “why cannot the ECB be more like the Fed?” The Federal Reserve bases its power soleley on the federal government of the US, and was created 1913, 48 years after the 2nd civil war, in which the Union made clear, that anybody opposing the Union and the supreme rule of the federal government, is exterminated. Soo, how shall we start such a sequence of your choice, specifically ? : – ) Or, do we prefer the present legal status of the ECB, to be not based on such terminal powers, but then logically stringent, every “nation” has to pay their own debt. ??? what do you prefer? @ Francis My comment was intended to underline the point that you seem to be making i.e. it is not possible to draw parallels between the Fed and the ECB because the latter is a central bank without a country. Ironically, the US was a country without a central bank until 1913. @DOCM This comment shows that the author has zero political nous. Insofar as a transfer union exists, it is largely in the direction opposite to what the author states unless the roof caves in. Another issue where experts disagree: The New Ökonomenstreit in Germany There is some weird stuff going on in Germany. A new and fierce debate among German economists about the Euro summit in Brussels on June 29 in particular, and about how to proceed in the Euro crisis more generally. […] Everything started with this manifesto in the FAZ by over 170 Economics professors, mostly in Germany or of German origin. They voiced their concern – indeed sometimes using emotional language, as I do on this blog – that Europe is heading into a liability (bank) union, which in particular will benefit owners (and debtors) of financial institutions and hurt both current and future tax payers in Germany. They, thus, bemoan a big distributional problem (as I have) in the current Euro policies. They also thought that the Brussels summit accelerated the path into such a union. […] Then came a counter-manifesto by Peter Bofinger, Gustav Horn, Michael Hüther, Dalia Marin, Bert Rürup, Friedrich Schneider und Thomas Straubhaar, which said essentially three and a half things: 1) they claim that the Brussels summit was not a path further down a European banking liability union, 2) that recapitalization of banks a la TARP is not only necessary, but also a good thing, 3) that the first manifesto should not have been in their opinion so fear-mongering; and the half was: they more or less directly questioned the scientific integrity of the authors and signatories of the original manifesto. […] etc. etc. http://www.vwlmac.rwth-aachen.de/blog/2012/07/the-new-okonomenstreit-in-germany/ The carousel continues. Economists — doncha love them? There are always a few who support one’s own prejudices. Just learn how to do a bit of data-dredging, quote selectively, and Bob’s your uncle. @francis Only the Copenhagen Ring truly and deeply sucks — Regietheater at its ghastliest. No beating Levine, though. The immortal Hildegard Behrens here (Brunhilde’s Immolation): CG, I watched on youtube the Apocalypse Now version, I knew previously. The scence from min 1:30 on reminded me of my ABC drills from kindergarden on, orderly and quickly. It took me 5 minutes to find my “Revolutionäre Kriegswissenschaft” again. and the plans for a 25 Watt Stereo! radio emitter, You gotta be prepared : – ) I later worked on picking alien devils from the sky as efficient as possible. @ Joseph Ryan Germany’s wealth distribution is skewed because of the low 44% residential property rate. However, there is still a high level of inequality. The UK’s rate here: http://www.guardian.co.uk/money/2012/dec/03/richest-10-uk-households-40-per-cent-wealth-ons I realize, that it might me useful for some people here, to mention, that I was a German NATO “wehrpflichtiger”, with the highest security clearance possible for that, more than a quarter century ago. i love the euro…don’t let it die… @Holbrook Fields OK, I won’t let the € die as long as you ensure that the £ rapidly goes from strength to strength while I’m in the UK earning it and sending the money home to Ireland. I would be very happy with a rate of £1 = above €1.50 thanks. Comments are closed.